When seeking funding for capital works, an owners corporation (also known as a body corporate or strata title community) will typically consider three principal sources of funding:
- Capital works fund (formerly known as the sinking fund)
- Special levy
- Strata loan
Before deciding which option (or mix of options) is best suited, it is important to consider the strengths and limitations of each.
Taking out a strata loan with Lannock Strata Finance provides a fast and cost effective solution, with the additional benefit of increased flexibility.
- Quick approval process – clients can expect a proposal within 24 hours of their enquiry
- The fast funding provided by a Lannock strata loan will allow the works to be completed immediately
- It’s cheaper and more effective to have the capital works done at once, at today’s costs, rather than in a drawn-out staged project which can be both expensive and inconvenient
- Immediate rectification can be especially important when the defects represent an impending safety or financial risk
- Owners receive the benefits of improvement sooner rather than later
- Owners benefit from an improved lifestyle and enhanced property value
- Investors obtain increases in rental return and capital value
- In most cases, taking out a loan is actually the cheapest option when the opportunity cost of alternatives is properly considered
- With Lannock Strata Finance, you only pay for the funds you use, when you use them
- The owners corporation will have the funds immediately, meaning they don’t have to wait for owners to pay, or risk them not being able to
- The loan is unsecured, requiring no mortgage, personal financials or guarantees
Drawdown multiple times at no extra cost to accommodate for variable expenses
Capital Works Fund
While capital works funds are a prudent, and indeed legally necessary, form of financial planning, many of their disadvantages are often overlooked. It is true that this fund can, when a specific outlay has been properly budgeted for, provide an immediate source of payment for capital works. However, regularly they do not properly account for large-scale works and are not the most effective solution.
High opportunity cost
- The overall cost of the project will grow while you wait to accumulate the necessary finances in a capital works fund
- Project inflation will lead to increased costs
- The property may deteriorate further during the waiting period
- The contributions to a sinking fund could often be put to better use (by paying off high-interest debts or investing the money elsewhere)
- The required funding can take a long time to accumulate
- Effective capital works funds are heavily dependent on accurate forecasts of future expenditure
- If the amount required is more than projected or is required earlier than expected, serious problems may arise
Special levies are also a common lever used to source additional funding. They can provide an efficient form of funding with very few hidden costs. However, for many reasons special levies are often not a viable solution.
Onerous financial burden
- Special levies place an heavy financial burden on the owners
- Special levies affect the cash flow of owners, eating into savings or requiring additional debts
- Many owners may have trouble raising the funds to pay by the due date for large special levy payments
Risk of delays
- Due to the high financial burden, special levies often require long periods of time to raise
- These time lags cause delays in commencing works and which, for reasons outlined above, is inefficient
- There is also an increased risk of not receiving enough funding if some owners are unable to pay the levy, leading to further delays and issues arising
Applying for a strata loan is fast and easy, so get in touch with the Lannock team on 1300 851 585 or email@example.com to find out more about why borrowing might be suitable for your owners corporation.